A real estate investment trust (REIT), is a securities based company that invests in real estate, either through direct ownership of properties or through mortgages. The company's securities sells like a stock and it must distribute at least 90 percent of it's annual taxable income to shareholders in the form of dividends.
An REIT offers it's investors high yields along with special tax considerations. In layman terms, an REIT gives it's investors ownership in several individual properties while minimizing the risks associated with putting all your eggs in one basket.
REITs invest in office complexes, hotels, shopping malls, warehouses, and apartment buildings. Some REITs invest in only one area of real estate while others are more diversified.
To become involved in an REIT, you can purchase shares directly on an open exchange or you can invest in a mutual fund that specializes in public real estate.
There are different types of Real Estate Investment Trusts:
•Equity REITs: This type of Real Estate Investment Trust makes investments in real estate, thereby owning the property outright and then collecting revenue from the rents charged to tenants.
•Mortgage REITs: A Mortgage REIT invests in mortgages and hold ownership of mortgages. This type of Real Estate Investment Trust loans money on real estate or purchases existing mortgages or mortgage backed securities, earning money that is generated by the interest payments on mortgage loans.
•Hybrid REITS: This type of Real Estate Investment Trust is a combination of Equity REITs and Mortgage REITs. It invests in both properties and mortgages.
To qualify for pass-through entity status for corporate income tax, an REIT must be structured as a corporation, association, or trust and be managed by trustees or a board of directors. It must also be be jointly owned by at least one hundred persons or more.
It must have transferable shares and no more than 50% of the shares can be held by 5 or fewer individual under the 5/50 rule during the last half of each taxable year. At least 75% of it's total investment assets must be in real estate.
No more than 20% of a REITs assets can consist of stock in taxable REIT subsidiaries and it must derive at least 75% of it's gross income from rents or mortgage interest.